Massive Spending, Massive Debt, Massive Interest and a Cure

Someone asked me today to call them up this afternoon and please give them a lesson in what is going on in our financial world.  Does that bring a smile to your face?  It brings a crooked one to mine.  How could I possibly know?  I think at times that maybe the Illuminati doesn’t even know.  And word is they are supposed to know sh—from Shinola.  If those world barons of finance and government control really exist, right? Stocks have crashed this week almost 600 points on the Dow, Gold is down today, September 23, 2011 to $1666.00 per troy ounce (whoops, now at $1650 in less than 10 minutes) from a high 30 days ago of $1924.00.  Wait, make that $1648 in less than a minute!  Silver follows gold like a thirsty Heifer being led single file to the slaughter.  So what’s going on?  Precious metals seem to be on a tailspin death dive after climbing steadily without much of a hitch for many months now.  The boys in the back room of financial institutions recommend having lots of physical gold and some gold certificates in your portfolio.  Why?  Because, the smart money says, you might need it if paper fiat money inflates off the face of the earth and  your dollars burn up and go “poof” from the Fed’s printing too many of them.  Last count shows that the Fed has printed over 2 Trillion in new bills in the last 2 and a half years.  Such dilution of value is scary.  Prices at the grocery have already shot up like a rocket in just a year.  Is inflation beginning to rear its ugly head as we were warned it would?  And if gold and silver would replace dollars as a medium of exchange for gasoline, food, and other staples, would this be a world we would want to live in?  A chilling thought.

Greece, they say, is close to the edge of the world in default and is about to fall off.  So what does that mean?  Well, one of the proposals to get Greece on financial life-support once again mandates giving Greek bonds a 50% haircut.  What that means is that normally a bond matures and is worth a preset redeemable amount of 100 cents on the dollar.  That is called PAR.  So magic scissors come down with an unseen hand and cut the bond interest rate in half.

If you hold $10,000 Greek bonds @ 8% interest per year worth of Greek bonds that were sold to you at Par yesterday, now the interest rate has been haircut to 4%.  So instead of getting $800 per year off your Greek bonds, you will now receive $400 per year.  Pay no attention to the $10,000 printed on neither the bond certificate nor the man behind the screen with the scissors.  Your $10,000 Greek bonds would be worth much less than $10,000 due to the arbitrary adjustment of interest downward.  Would it be apropos to say, hair(cut) today, gone tomorrow?  Or par today…….gone tomorrow?  It is indeed a messy business haircutting the value of bonds from Greece and other countries in the world just so the countries can stay afloat.

So what does this do for Greece?  It cuts their debt in half.  Instantly.  Greece is in business again.  The amount of interest Greece has to pay on its debt to maintain its life as a real country with traffic cops, mayors, sanitation workers, dept. of tourism, and national parks like the Pantheon, for example, is cut in half.  Buys more time quite neatly.  And those left holding the bag are the bondholders whose capital in Greece bonds is cut in half.  To get there, to reorganize Greece must default on its original bonds.

Greece is in the world spotlight, so how is this affecting world markets in other lands, and what is causing their markets to plunge, too?  The ripple effect of fear seems to be alive and well.  Simply stated, the rest of the world fears that they might be next.  And the stock markets in most all countries and their massive amounts of borrowed money in the form of bonds is susceptible to the same austere ring of “No tickee, no washee.”  Everything falls down in disarray when countries default on their loans.  And Americans are feeling a bit skeptical what with 14.3 Trillion dollars borrowed and spent and the compound interest that is accumulating with every tick of the clock.  So what might happen if the United States would ever default on its debt?  Perish the thought.  Things like government services would cease to be.  Social Security checks would not get sent out.  Hospitals would not accept Medicare.  Governor Rick Perry might be hard pressed to pay his electric bill, but not really because it is certain he has emergency generators in the wings. Buses would stop running.  There would be a run on banks with mobs seeking to get their money in their hot hands.  Police, firemen and garbage men would be without pay and fuel to get to their destinations.  Pandemonium would prevail.

How did we get to this place?  You know, on the precipice to disaster where many nations of the world have borrowed so heavily that they could just fall like dominos one after another?  More to the point, could we have prevented such a crisis?  Why did no one protest very strongly when all this borrowing began?  In a Cabinet meeting of Bush II, a question arose about borrowing more money to finance all the wars, the expensive toilet seats Uncle Sam buys.  Bush II was against it, but Cheney piped up that “It is our mandate now to follow through on military spending to defeat terrorism, and Reagan taught us that deficits don’t matter.”

A deficit is the shortfall of funds that you need to borrow to keep operating as a nation of governed people.  That is the amount short of federal income from taxes and royalties that is needed to keep the country running and the bills paid on time.

In Greece’s case, Goldman-Sachs propped the country up with derivatives, a temporary measure to buy them time, and derivatives turn out usually to be more disastrous than real cures.  And they were.  Goldman only made things worse.

When all the countries of the world are so accustomed to borrowing the shortfall amounts needed to run government services and then that ability to borrow is suddenly frozen, it becomes crunch time.  What to do?  Right now, Japan and China are making noises about not getting further into debt with the United States.  Those countries are threatening to stop lending to the United States to cover its needs in paying for services and commodities already on the books and a vital part of America’s existence as a nation.  China says it favors taking away the US dollar as the world currency.  Now, for example, if a country wishes to buy oil it first has to convert its currency to US dollars, then purchase the oil.  Many economists  predict financial Armageddon for America if that were to happen.  Who can say what the financial landscape would look like if it came to pass?  No one knows, but it looks grim.

The tough times began to come to our shores when borrowing and spending became a way of life.  Ronald Reagan borrowed 3 Trillion dollars in 8 years to defeat Russia, the Evil Empire, he called the Russians.  Then Bush II borrowed and spent an additional 4 Trillion dollars on attacking and occupying Afghanistan and Iraq.  It has been over 8 years since that time and the debt has grown immensely.  We cannot pay just the interest on what we have borrowed from the Chinese.  We ran out of money.  And now it appears we will run out of lenders to help us stave off bankruptcy and shutting the government down.  See it’s not just Greece’s problem, it is ours and the rest of the world’s problem.  We borrowed too much and spent too much for our own good.  President Obama and the Congress have said much about the problem we face.  There has been much jaw-boning, but very little progress on meaningful solutions.  We borrowed too much and lived too high on the hog, that’s all.  Plain and simple.  So what will happen when the sh—hits the fan?  I don’t know.  Will angry people all over the world riot for food and water and medicine freshly ripped from their hands because now their respective government cannot pay the piper?  I hate to say it but I don’t know that either.  It is hard to know much after everything of real value gets shelled out and the husks discarded on the ground.

Should we buy US Treasury Bonds now?  The yield is at an historic 60-year low in yield because of great world demand in panic scenarios.  But why would they want US bonds when we have a 14.3 Trillion dollar debt?  Does it seem like the US is a good risk right now on paying interest and making good the principal of its bonds?  It would appear that that is true as the world flocks to US Treasuries like never before.  Apparently the world still sees the United States and its recently downgraded Standard and Poor’s paper as a better risk than any other time in history.  But why?  I wish I knew that answer too.  But I don’t.  These are new times.

A Blackjack dealer in Vegas told me once that if the world ever fell upon hard times there were 2 staples to own and hoard.  These 2 items, she said, would never lose their luster and demand, and would sit on the shelf forever with no tending.  I begged her to tell me about these 2 items, and she said with a wry smile, “Whisky and Cigarettes.”  Hmmm.  In lieu of the great financial gurus and geniuses that have led us to this dark crossroads in our history, and their track record, maybe Whisky and Cigarettes would be one of the best hard-times investment vehicles one could buy.  To trade, of course, for like food and gasoline.

TPJ MAG